Monday Musings: February 10, 2020

Feb 10, 2020

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Public Trust Credit Team
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January's economic readings show no indications of an unsupportive U.S. economy to start the year

The U.S. reported strong economic indicators last week with the January ISM manufacturing number coming in well above expectations at 50.9 and out of contractionary territory for the first time in five months. ISM non-manufacturing also beat consensus at 55.5, the strongest reading since August of last year, as upbeat business activity continues to drive strength in the non-manufacturing sector. Labor market conditions remain robust with a January nonfarm payroll print of 225k, well in excess of median survey estimate of 165k. This week, markets will be focused on the outlook for inflation and consumer spending as the latest CPI and retail sales figures are scheduled to be released over the coming days. General expectations are for a slight softening in retail sales and fairly stable prices in comparison with December. Uncertainty surrounding the coronavirus and its potential impact on the global economy will likely persist for the foreseeable future. However, the most recent economic data shows all signs pointing toward a positively trending U.S. economy.

High level of investment grade issuances with the tightest credit spreads seen in 52 weeks

Strong economic reports are supportive of new issuance among the investment grade universe. On February 10, 2020, Bloomberg reported that investment banks’ syndicate desks are expecting $30 billion in issuance this week, well above the $21 billion issued last week. With such a large volume of new paper, credit spreads have nearly reached their tightest in the past year. Tight spreads may be a fleeting phenomenon, though, as coronavirus could drive spread widening. The potential for wider spreads would normally lead issuers to wait for lower spreads/higher prices, but the Credit Team speculates that issuers may want to issue into a receptive market ahead of Chairman Powell’s testimony to Congress and Thursday’s CPI announcement. Regardless of the reason, the volume of issuance suggests that investors remain bullish on credit for the time being.

The IMF's second highest ranking official to depart at the end of February shaping the way for a new pick from the Trump Administration

The International Monetary Fund (IMF) announced last Friday that David Lipton, the organization’s First Deputy Managing Director (FDMD), would be leaving the IMF at the end of February. Having held the position since September of 2011, Mr. Lipton is the longest serving FDMD. Interestingly, Mr. Lipton’s departure opens the door for the position to be filled by the Trump Administration. Traditionally, the U.S. and Europe have an informal agreement whereby the pick of IMF director goes to Europe and the U.S. nominates the number one position at the World Bank. With the U.S. being the largest shareholder in both organizations, it also informally nominates the number two position at the IMF. 
 
Additionally, the organization announced Carla Grasso, the Chief Administrative Officer, would be leaving at the end of February, as well. Much of the latest reorganization comes as new Managing Director Kristalina Georgieva aims to restructure her leadership team and add her signature mark to the IMF. Mrs. Georgieva took over the top position in October of 2019 for a five-year term, replacing Christine Lagarde (who is now President of the European Central Bank). The U.S. had little advanced notice of Mr. Lipton’s early dismissal, which comes 19 months before his term ends, and as such does not currently have a list of possible candidates for the position. However, much like the Trump Administration’s pick of David Malpass to lead the World Bank, this opportunity now paves a path for President Trump to nominate a successor who aligns with his global policies.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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